Tax on Room Rent Income and Savings

BoracicLint

Morning all,

I hope someone here can reassure me that I'm corect in my assumptions... Up until last year my tax was straightforward, just PAYE at the higher rate with no additional income from savings etc..

However, in the financial year 2013-14 I took in 2 lodgers and received more than the rent-a-room scheme allowance of £4250. I also received interest from savings.

I currently earn £35k so as I understand, the income I earn from renting out rooms + my savings interest is taxable at 40%.

Looking at the rent a room scheme, I believe it may be more cost effective for me to opt-out of the scheme and declare my income as normal rental income (income - expenses). Am I correct in thinking I can offset the income against insurance, maintenance, repairs, bills, and also the interest I pay on my mortgage?

If so, how do I calculate how much mortgage interest I can deduct from the income? Can I deduct all of it, or do I have to use 2/3 as I am living there also? Same for the bills, do I have to divide them up based on the number of people living there or can I offset all the bills?

With regards to the income from savings, I believe this is automatically deducted at 20% from the bank, so I will have to declare that I owe an additional 20%, is this correct? Most people I've spoken to in my income bracket don't complete tax returns, so how is their savings interest taken by the taxman? (assuming they have any!)

Looks like I'll be spending my weekend doing a self assessment! I know I've got plenty of time but I'd like to get it out of the way. Once I start doing a tax return, will I have to do so every year? (even if I stop renting rooms out?)

Sorry for the long post, if anyone has any experience in these matters I would be grateful for any insight.

BoracicLint

Another question: I've been reading about the types of expenses I can claim for my tax calculation. Can I use the wear and tear allowance in addition to the other expenses (bills,mortgage interest etc.) to deduct 10% of the net annual rent as well?

00ec25

BoracicLint wrote: »

However, in the financial year 2013-14 I took in 2 lodgers and received more than the rent-a-room scheme allowance of £4250. I also received interest from savings.

if you have 2 or more lodgers then you lose your full private residence relief meaning when you eventually sell the property it will be partially liable to Capital Gains Tax - but you can claim letting relief which may or may not cover all the gain leaving you with little or nothing to actually pay

I currently earn £35k so as I understand, the income I earn from renting out rooms + my savings interest is taxable at 40%.
for 13/14 the 40% bracket started at 41,450 (first 9,440 tax free + 32,010 @20%) so is your rent + gross savings interest more than 6,450?

Looking at the rent a room scheme, I believe it may be more cost effective for me to opt-out of the scheme and declare my income as normal rental income (income - expenses). Am I correct in thinking I can offset the income against insurance, maintenance, repairs, bills, and also the interest I pay on my mortgage?

If so, how do I calculate how much mortgage interest I can deduct from the income? Can I deduct all of it, or do I have to use 2/3 as I am living there also? Same for the bills, do I have to divide them up based on the number of people living there or can I offset all the bills?

you must apportion all costs - there is no set method for doing so but whatever you use must be reasonable. Basing it on people count is obviously the most advantageous to you, the other typical way is number of bedrooms, which may not work so well if its a 4 bed house!

With regards to the income from savings, I believe this is automatically deducted at 20% from the bank, so I will have to declare that I owe an additional 20%, is this correct? Most people I've spoken to in my income bracket don't complete tax returns, so how is their savings interest taken by the taxman? (assuming they have any!)
correct

Looks like I'll be spending my weekend doing a self assessment! I know I've got plenty of time but I'd like to get it out of the way. Once I start doing a tax return, will I have to do so every year? (even if I stop renting rooms out?)

Sorry for the long post, if anyone has any experience in these matters I would be grateful for any insight.

BoracicLint wrote: »

Another question: I've been reading about the types of expenses I can claim for my tax calculation. Can I use the wear and tear allowance in addition to the other expenses (bills,mortgage interest etc.) to deduct 10% of the net annual rent as well?
correct

at the end of the day you have untaxed rental income in excess of the RAR limit so must notify HMRC of this fact. HMRC may or may not decide you have to do a tax return, they could for example simply allow you to send a letter showing your figures

if HMRC tell you to do a tax return then you must continue to do so until they tell you to stop. Obviously if your rental income ceases you can ask HMRC to reconsider the need for a tax return but only they can make the decision, if you don't submit and have not been told to stop you will get an automatic £100 fine

BoracicLint

Thanks for the reply 00ec25. Regarding your point about having 2 lodgers and being liable for capital gains, I thought this was for 'more than 2 lodgers' as opposed to '2 or more lodgers'.

Also your point about income tax rates, I thought it was 40% above £32,010. I didn't realise this was on top of my allowance? I thought on £35k salary, it would be calculated as the first £10k tax free, then £32k - £10k (£22k) at 20%, and everything else above £32k at 40%. If what you are saying is correct then my tax bill is going to be much lower, but unfortunately still in the 40% bracket

It's a three bed house so I figure dividing everything up into thirds is appropriate (I'm single, so just me + 2 lodgers).

BoracicLint

Just so I'm clear, using the rent a room allowance as an example, is this calculation correct...

Income
£35,000 salary
£4,800 second employment
£8,000 rental income (2 lodgers)
£500 savings interest

Total gross income = £48300

Allowances
£10,000 personal allowance
£4,250 rent-a-room allowance

Taxable income = £34,050 (of which £32,010 is at 20%, the remainder at 40%)

Tax due for 2013-14 = £7,218

I can then do the same calculation using the income-expenses method and see which is the better option. Is that correct?

CLAPTON

do you not pay anything into a pension?

BoracicLint

Hi CLAPTON, I have just enrolled into a workplace pension for this tax year, but for 2013-14 I didn't make any contributions into a pension.

00ec25

BoracicLint wrote: »

Thanks for the reply 00ec25. Regarding your point about having 2 lodgers and being liable for capital gains, I thought this was for 'more than 2 lodgers' as opposed to '2 or more lodgers'.

you think wrongly - as i said, 2 or more
http://www.hmrc.gov.uk/manuals/cgmanual/cg64702.htm

BoracicLint wrote: »

If what you are saying is correct.

oh dear, another example of why financial education should be taught in school!
read: http://www.hmrc.gov.uk/incometax/basics.htm
How much Income Tax you pay
After ... any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.

http://lmgtfy.com/?q=how+to+calculate+income+tax+

BoracicLint wrote: »

is this calculation correct...
Total gross income = £48300

Allowances
[STRIKE]£10,000[/STRIKE] 9,440 personal allowance
£4,250 rent-a-room allowance

Taxable income = £3[STRIKE]4,050[/STRIKE] 34,610 (of which £32,010 is at 20%, the remainder at 40%)

Tax due for 2013-14 = £[STRIKE]7,218[/STRIKE] 7,442

I can then do the same calculation using the income-expenses method and see which is the better option. Is that correct?

you are mixing up 13/14 and 14/15 rates
http://www.hmrc.gov.uk/rates/it.htm
for 13/14 the personal allowance was 9,440 and the basic rate band 32,010 so 40% starts at 41,451 and above

for 14/15 it is 10,000 and 31,865 so 40% is 41,866 and above

BoracicLint

Thanks again 00ec25. I agree, financial education should be taught in school. I didn't mean any offence in questioning your reply, so apologies if you took it that way.

With regards to the private residence relief, it seems I can get letting relief also. For this I assume I work out the percentage of the house that is let based on dividing up the bedrooms and also the time I've let part of the property?

For example if I own the property for 10 years and then sell up, and during that time I let 2 thirds of the property for 2 years, I would base the calculation on the property being 87% mine, 13% let? (i.e averaging the amount of the property that has been let over the period of ownership)? Is that right?

Thanks again